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Effects of government investment are studied in an estimated neoclassical growth model. The analysis focuses on two dimensions that are critical for understanding government investment as a fiscal stimulus: implementation delays for building public capital and expected fiscal adjustments to deficit-financed spending. Implementation delays can produce small or even negative labor and output responses to increases in government investment in the short run. Anticipated fiscal adjustments matter both quantitatively and qualitatively for long-run growth effects. When public capital is insufficiently productive, distorting financing can make government investment contractionary at longer horizons.
This paper contributes to the debate about fiscal multipliers by studying the impacts of government investment in conventional neoclassical growth models. The analysis focuses on two dimensions of fiscal policy that are critical for understanding the effects of government investment: implementation delays associated with building public capital projects and expected future fiscal adjustments to debt-financed spending. Implementation delays can produce small or even negative labor and output responses in the short run; anticipated fiscal financing adjustments matter both quantitatively and qualitatively for long-run growth effects. Taken together, these two dimensions have important implications for the short-run and long-run impacts of fiscal stimulus in the form of higher government infrastructure investment. The analysis is conducted in several models with features relevant for studying government spending, including utility-yielding government consumption, time-to-build for private investment, and government production.
This paper contributes to the debate about fiscal multipliers by studying the impacts of government investment in conventional neoclassical growth models. The analysis focuses on two dimensions of fiscal policy that are critical for understanding the effects of government investment: implementation delays associated with building public capital projects and expected future fiscal adjustments to debt-financed spending. Implementation delays can produce small or even negative labor and output responses in the short run; anticipated fiscal financing adjustments matter both quantitatively and qualitatively for long-run growth effects. Taken together, these two dimensions have important implications for the short-run and long-run impacts of fiscal stimulus in the form of higher government infrastructure investment. The analysis is conducted in several models with features relevant for studying government spending, including utility-yielding government consumption, time-to-build for private investment, and government production.
This paper uses the IMF's Global Integrated Monetary and Fiscal Model to compute shortrun multipliers of fiscal stimulus measures and long-run crowding-out effects of higher debt. Multipliers of two-year stimulus range from 0.2 to 2.2 depending on the fiscal instrument, the extent of monetary accommodation and the presence of a financial accelerator mechanism. A permanent 0.5 percentage point increase in the U.S. deficit to GDP ratio raises the U.S. tax burden and world real interest rates in the long run, thereby reducing U.S. and rest of the world output by 0.3-0.6 and 0.2 percent, respectively.
How effective was public investment in stimulating the Japanese economy during the economic stagnation of the 1990s? Using a dataset of regional public investment spending, we find that investment multipliers were higher than for public consumption, although they were relatively low and declining over time. The paper also finds that the effectiveness of economic infrastructure investment, implemented mainly by the central government, is lower than that of social investment mostly undertaken by local governments. These results suggest that while public investment may yield higher output effects than other spending, its effectiveness depends upon its composition, the level of government implementation, and supply side factors.
The paper assesses, using seven structural models used heavily by policymaking institutions, the effectiveness of temporary fiscal stimulus. Models can, more easily than empirical studies, account for differences between fiscal instruments, for differences between structural characteristics of the economy, and for monetary-fiscal policy interactions. Findings are: (i) There is substantial agreement across models on the sizes of fiscal multipliers. (ii) The sizes of spending and targeted transfers multipliers are large. (iii) Fiscal policy is most effective if it has some persistence and if monetary policy accommodates it. (iv) The perception of permanent fiscal stimulus leads to significantly lower initial multipliers.
Given the backdrop of pressing infrastructure needs, this paper argues that higher German public investment would not only stimulate domestic demand in the near term and reduce the current account surplus, but would also raise output over the longer-run as well as generate beneficial regional spillovers. While time-to-build delays can weaken the impact of the stimulus in the short-run, the expansionary effects of higher public investment are substantially strengthened with an accommodative monetary policy stance—as is typical during periods of economic slack. The current low-interest rate environment presents a window of opportunity to finance higher public investment at historically favorable rates.
This book offers a series of statistical tests to determine if the “crowd out” problem, known to hinder the effectiveness of Keynesian economic stimulus programs, can be overcome by monetary programs. It concludes there are programs that can do this, specifically “accommodative monetary policy.” They were not used to any great extent prior to the Quantitative Easing program in 2008, causing the failure of many fiscal stimulus programs through no fault of their own. The book includes exhaustive statistical tests to prove this point. There is also a policy analysis section of the book. It examines how effectively the Federal Reserve’s anti-crowd out programs have actually worked, to the extent they were undertaken at all. It finds statistical evidence that using commercial and savings banks instead of investment banks when implementing accommodating monetary policy would have markedly improved their effectiveness. This volume, with its companion volume Why Fiscal Stimulus Programs Fail, Volume 2: Statistical Tests Comparing Monetary Policy to Growth, provides 1000 separate statistical tests on the US economy to prove these assertions.
The recent financial crisis had a profound effect on both public and private universities. Universities responded to these stresses in different ways. This volume presents new evidence on the nature of these responses and how the incentives and constraints facing different institutions affected their behavior.
This book scientifically tests the assertion that accommodative monetary policy can eliminate the “crowd out” problem, allowing fiscal stimulus programs (such as tax cuts or increased government spending) to stimulate the economy as intended. It also tests to see if natural growth in th economy can cure the crowd out problem as well or better. The book is intended to be the largest scale scientific test ever performed on this topic. It includes about 800 separate statistical tests on the U.S. economy testing different parts or all of the period 1960 – 2010. These tests focus on whether accommodative monetary policy, which increases the pool of loanable resources, can offset the crowd out problem as well as natural growth in the economy. The book, employing the best scientific methods available to economists for this type of problem, concludes accommodate monetary policy could have, but until the quantitative easing program, Federal Reserve efforts to accommodate fiscal stimulus programs were not large enough to offset more than 23% to 44% of any one year’s crowd out problem. That provides the science part of the answer as to why accommodative monetary policy didn’t accommodate: too little of it was tried. The book also tests whether other increases in loanable funds, occurring because of natural growth in the economy or changes in the savings rate can also offset crowd out. It concludes they can, and that these changes tend to be several times as effective as accommodative monetary policy. This book’s companion volume Why Fiscal Stimulus Programs Fail explores the policy implications of these results.